Beating Benchmarks and Passive Investing with Advanced Analytics

In this current investment environment of volatility, uncertainty, complexity, huge institutional asset flows, sentiment, and social media, it has become important to pay more attention to and have respect for price trends. Evaluating and measuring today’s price trends though requires sophisticated analytical models versus relying solely on traditional technical analysis approaches. Trendrating is taking on the challenge to prove that active managers can beat their benchmarks and passive fund performance with the right tools and market intelligence added to their investment methodologies.

The greatest opportunity for active managers to outperform their benchmarks and passive products

Active managers have a great opportunity to deliver alpha profiting from the fact that equity markets display a huge dispersion of performance all the time. In 2020, if you look at the S&P 500 constituents, the differential between the top 25% performers and the bottom 25% performers was massive. The average return of the top 100 stocks was 105% while the bottom 100 was -18%. This is enough to provide an opportunity for prepared, active stock pickers to beat the 16% return of the index. It is clear that if an active manager can capture a part of the top performers and avoid most of the bottom performers, they can make up for their fees several times over.

What active investment managers should be focusing on

Any benchmark at any time is a list of stocks aggregating securities in a bull trend and securities in a bear trend with a well-defined distribution or allocation. All it takes is for active managers to make sure that the “trends allocation” of their portfolios is better than the one of the chosen benchmark to beat.

The key is to develop strategies that overweight the exposure to rising stocks, while limiting positions on falling issues. We call it “trends allocation analysis and management” vs. the index. We developed a sophisticated multi-factor model to provide a way to rate the trends of individual stocks and enable an aggregated “rating” for portfolios.  For example, a portfolio rating of A-, higher than the benchmark rating of B+, increases the probability to outperform.

 Not necessitating a major change for active managers’ investment processes

At Trendrating, our vision is that every strategy should incorporate an element of trend valuation. It is about acknowledging, respecting and profiting from actual, observable price trends at the heart of this price dispersion, rather than strictly believing in subjective forecasts or price objectives based on whatever approach. To put it simply, all it takes is to incorporate some trend valuation metrics into the defined investment strategy. This leverages the profit potential of their existing methodology by adding a layer of objective, unbiased trend assessment.

Price trends are more extreme and last longer than in the past as they are impacted by several factors of which company fundamentals are only a small part. Money flow caused by major firms, analyst sentiment, social media sentiment, momentum players, and an economic landscape full of uncertainty and fast changing scenarios all contribute to creating and accelerating price trends in either direction that fundamental-driven methodologies cannot capture.

Designing an advanced price trend analytic tool to help active managers

Our team has 25 years of experience building equity models, and after many years of research and development, we designed a way to rate price trends. We provide a rating for trends with a time horizon of 6-to-18 months. These trends tend to make a measurable difference in the yearly performance important to active managers. The model captures the beginning of bull and bear trends on individual stocks with a reasonable accuracy. A and B ratings confirm bull trends while C and D rating identify bear trends.

Our mission is to provide a well validated, robust metric to qualify the true direction and quality of price trends. We do not forecast how long and how far a trend can go. We do not believe in forecasting. What we provide is a clear rating that reflects the strength and quality of existing price trends. Our data provides discipline and objectivity as a solid sanity check across the holdings of any portfolio.

To make this easy and actionable, we introduced a critical, innovative metric to evaluate the overall trend exposure of portfolios. In addition to rating the individual holdings, we can then calculate the aggregated, weighted rating of the entire portfolio. It is called the Trend Capture Rating (TCR).

How active investment managers can use the TCR tool to beat their benchmarks

TCR measures how your portfolio is positioned in terms of rising stocks vs. falling securities. For example, if the portfolio TCR is B- while the benchmark TCR is B+, you need to examine the underlying holdings to find out why.  If my portfolio is holding 30% or greater of C and D rated stocks, while the benchmark contains only 15%, then the probability for the active portfolio to beat the benchmark is little to none. By raising the TCR of the portfolio to B+ or higher the chances to outperform substantially increase.

Improving the portfolio rating is easy. The manager can just reduce the exposure to C and D rated stocks by reallocating more to other stocks in the same universe that fit with a positive rating (A or B). Adding TCR analysis can remarkably improve the performance of fundamental-driven investment strategies, combining good fundamentals with proven price action predictive analytics.

Invitation for active investment managers on this new investment technology

We readily offer free evaluations of our data and technology platform to let active managers put our tools to the test. We encourage those interested to run an actual performance comparison of sample portfolios with and without using our methodology. Facts will show if what we say is true.

We invite you to explore our asset management toolkit on Bloomberg  or visit us on our website to see how we work with professional investors. The evolutionary trend toward higher standards of value and efficiency by combining elements of both human knowledge and technical innovation will force a change away from the status quo. And our proposition is simple and clear – get the trend allocation right and beat passive products and benchmarks.

By Rocco Pellegrinelli, CEO of Trendrating

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